Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


What is dividend investing?

Francesco Lavecchia  |  23 Jul 2021Text size  Decrease  Increase  |  
Email to Friend

Dividend investors look for stocks that pay out high dividends, giving them a regular income stream in addition to any growth in the market value of the stock.

There are several reasons for buying dividend payers:

  • Fixed income investments may not provide enough income to overcome the depreciation of your capital in a low interest rate environment.
  • Higher guarantee of cash flow
  • Total return: Dividend accumulation, especially where dividends grow, can boost an investment's total return. According to a Morningstar study focusing on the S&P 500, dividend returns counted for 16 per cent of the total return between 2010 and 2019.

To be eligible for dividends, investors must be a "shareholder of record", the registered owner of a security with the rights, benefits and responsibilities of ownership, such voting at the company's AGM.

Take note that stocks trading "ex-dividend," have already paid out dividends and buyers after this date won't receive the most current dividend payout.

Two ways to invest in dividend stocks

There are two common strategies when it comes to investing for dividends: high dividend yield, or high dividend growth.

A high yield approach picks according to dividend yield. This offers high rewards in the short term but also risks falling into a dividend trap, where dividends are unsustaintable and the firm reaches a point where it can no longer pay dividends, negatively affecting the total return of a portfolio.

This can occur when companies pay dividends from the proceeds of selling part of its business, even while the core business struggles, or when a firm increases its debt to cover its dividend. 

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

A high dividend growth strategy also focuses on the quality of the business and financial health of the company. A high quality business should be able to grow profits despite adverse economic trends, and strong financial health often means a company can afford to pay long-term dividends.

At Morningstar we adopt this approach in the construction of the Morningstar Australia Dividend Yield Focus Index. The index constituents are a subset of the Morningstar Australia Index, excluding REITs. It takes the top 25 companies by 12-month dividend yield after screening for narrow or wide economic moat and 'distance to default', a measure of a company's financial stregnth.

The 25 holdings of the Morningstar Australia Dividend Yield Focus Index are expected to provide high-quality dividends. The top six names by weight include the over-valued Wesfarmers (ASX: WES) as well as the fairly-valued gas infrastructure owner APA Group (ASX:APA)

The index does not incorporate Environmental, Social, or Governance (ESG) criteria, but we've created a separate list of names for those who want ESG-friendly dividends

is a research editor specialising in the Italian market.

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend